Fed Chair Warsh Signals Hawkish Stance, Markets React to Hike Bets

Federal Reserve Chair Kevin Warsh gave his first major speech as chairman on August 28 at this year's Jackson Hole Economic Policy Symposium, signaling an unexpectedly hawkish stance that boosted market expectations for a rate hike next month.

Global markets traded mostly lower at the start of the week, with stocks sinking and oil jumping on Warsh's comments and US-Iran strikes. Traders of fed funds futures now see a 60.4% chance of a quarter-point hike in September. Gold fell and Asian stocks declined on Monday following the speech. JPMorgan traders dropped their bullish view on stocks after Warsh's remarks.

Barclays forecasts two Fed rate hikes after the Jackson Hole speech. Warsh told G20 finance leaders on Monday that the world is seeing a global investment surge that is helping to power growth, reversing past savings gluts. The highlight is the Federal Reserve chair's annual address, usually given on Friday morning. Paul Volcker was the first Fed chair to attend in 1982, and Alan Greenspan was a regular opening speaker for over 14 years.

Jerome Powell, Warsh's immediate predecessor, frequently used his annual address to foreshadow Fed policy. Warsh explained that forward guidance, the practice of broadcasting monetary policy moves in advance, became a regular practice during the global financial crisis to maintain market calm. However, the current Fed chair believes it has overstayed its welcome, as markets have become too reliant on this information, potentially locking the central bank into foreshadowed policies regardless of changing circumstances.

President Donald Trump declined to criticize Warsh for suggesting a potential rate increase, stating he trusts his appointee will do what he has to do, but also said he thinks interest rates are too high.